Michigan economy: State should avoid recession, but inflation has eaten up wage gains

LANSING — Both of Michigan's fiscal agencies now say Michigan should avoid a recession in the short term, but in new reports they also shed light on why many Michiganders might feel like they are in one, despite strong employment numbers.

This is the third consecutive year in which personal income is projected to shrink in Michigan, relative to inflation, according to the Senate Fiscal Agency. The House Fiscal Agency gives a slightly rosier forecast, with inflation-adjusted income growing by less than a percentage point this year, after two years of shrinkage. Both reports were prepared in advance of a conference Friday at the Capitol.

The conference with economists, the budget director, the treasurer, and key lawmakers, is used to reach a consensus on how much tax revenue the state should expect to take in over the next few years. It is held twice annually, once in January, and once in May, about a month before the state budget is often finalized.

National data released Thursday shows inflation, after tumbling in the fall, edged up in December, with higher rent, food, and gasoline prices being the main culprits.

Growth, while not robust, continues to be a little stronger than expected, both nationally and in Michigan, say the fiscal agency reports, which give upward revisions to revenue estimates that were projected last May.

"The forecast assumes the labor market will eventually soften and the economic growth will slow to 1.7% in (calendar year) 2024, but avoid a recession," the House Fiscal Agency said in a report released late Wednesday.

The Senate Fiscal Agency, in a Jan. 5 report, also projects slow economic growth, with Michigan experiencing slower growth than the nation as a whole.

Many economists define a recession as two consecutive quarters of negative growth.

Although personal income in Michigan increased 0.7% in 2022 and 4.3% in 2023, and is projected to increase 3.3% this year, the Senate Fiscal Agency says all of that growth was more than offset by inflation, and "real personal income" — adjusted for inflation — shrank 6.9% in 2022, an estimated 1.5% in 2023, and will contract 0.2% in 2024. Real personal income is expected to grow 1.8% in 2025 and 1% in 2026, the Senate Fiscal Agency said.

The House Fiscal Agency projects real personal income growth of 0.9% this year, followed by growth of 2% next year and 1.4% in 2026. It estimates real income in Michigan shrank by 0.6% in 2023.

Gov. Gretchen Whitmer has said many of her recent budget initiatives are aimed at helping Michigan families struggling with inflation. Those include a hike in the Earned Income Tax Credit, reduced taxes on retirement income, and support for child care.

"Under Gov. Whitmer's leadership, Michigan's economy continues to show incredibly strong growth and resilience," spokeswoman Stacey LaRouche said Thursday.

Net tax revenues are expected to remain mostly flat for the next couple of years, but that's a little better than state economic forecasters expected last May.

The Senate Fiscal Agency says net general fund and School Aid Fund revenue for the fiscal year that ended Oct. 1 totaled $31.7 billion. That's down 4.2% from a year earlier. But that drop was expected because of a one-year reduction in Michigan's personal income tax rate and an increase in the Earned Income Tax Credit, among other factors.

Looking ahead, combined revenues are expected to total $31.6 billion in the current fiscal year and $32.5 billion in 2025. Those projections represent increases of $461.2 million and $296.1 million, respectively, from what state officials estimated in May. Also, the Senate Fiscal Agency's 2023 total has been revised upward by $184.2 million, reflecting slightly stronger than expected economic growth.

The House Fiscal Agency revised combined revenues upward by $183 million in 2023, $539 million in 2024, and $103 million in 2025.

Those improved revenue numbers are among the reasons the Senate Fiscal Agency projects healthy fund balances when the current fiscal year ends Sept. 30 — $1.4 billion in the general fund and $305 million in the School Aid Fund. Those balances reflect a mix of one-time and ongoing money, according to the report. They are in addition to a projected $2 billion in the state's Rainy Day Fund, after Whitmer and lawmakers socked extra money away during record surpluses experienced largely as a result of federal stimulus payments at the height of the COVID-19 pandemic.

Budget Director Jen Flood has projected a return to normalcy in the 2025 budget that will be proposed in February, after years of record surpluses.

A pending lawsuit, now before the Michigan Court of Appeals, argues that the 2023 cut in the personal income tax rate to from should be permanent, not one year. If the courts should rule that way, revenue estimates would need to undergo significant downward revisions.

Contact Paul Egan: 517-372-8660 or pegan@freepress.com. Follow him on X, @paulegan4.

This article originally appeared on Detroit Free Press: Michigan should avoid recession, but inflation has eaten up wage gains